ASC and IRC Valuations

409a Valuation

Accounting Standard Codification (ASC) 820 (formerly known as Financial Accounting Standard (FAS) 157)

  • As per ASC 820 (formerly known as FAS 157) guidelines, “Fair value” is “the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”
  • Private equity and venture capital firms need to value their holdings in unlisted firms, startups, and other illiquid assets using a fair value measurement approach, which is complex and difficult. The approach involves an in-depth understanding of current global market conditions. It also requires a detailed portfolio valuation study, including documents like articles of association, term sheets, capital structure, stock purchase agreements, financial statements analysis, etc.

Internal Revenue Code (IRC) 409a Valuation

  • 409A Valuation is an independent appraisal of the fair market value, done for the unlisted or private companies and startups who are willing to offer stock options to their key employees, to determine the strike price for issuing stock options. Such compensation is referred to as non-qualified deferred compensation as an employee earns such compensation in the current year but will receive it in the future year. IRC 409A regulates the treatment for federal income tax purposes for such non-qualified deferred compensation.
  • The valuation process is based on a comprehensive analysis of financial statements, business plans, financial projections, shareholder agreements, product descriptions, and management strategic reports. All the options should be granted at an exercise price equal to or higher than the fair market value. Employees receiving the deferred compensation benefits may incur an income tax penalty of up to 20% in the event the company issues deferred compensation below fair market value.
409a Valuation report

Accounting Standard Codification (ASC) 805 (formerly known as Financial Accounting Standard (FAS) 141R)

  • ASC 805 emphasizes that any activity, to be considered as a business, mandatorily has inputs and processes elements which results in outputs. ASC 805 (formerly known as FAS 141R) provides guidance for accounting and reporting of the business combination.
  • As per the guidelines stated, on the acquisition date an acquirer will recognize and measure all the identifiable assets acquired, liabilities assumed, and non-controlling interest (if any) in the target company. Apart from tangible assets, intangible assets should also be recognized and recorded as an asset in the form of contractual and legal rights (i.e. intangibles) and are separate from goodwill.
  • When one company acquires another, the regulatory and tax reporting authorities trigger the requirement of a Purchase Price Allocation in order to determine the purchase price paid by the buyer to the seller for each asset acquired in the transaction.
  • PPA is important for acquiring companies as Intangible assets are amortized over their expected lives, which can have a significant effect on reported earnings.
  • PPA also assists stakeholders with ascertaining true value and obtaining more information about a company’s intangible value.
  • Most commonly recorded intangibles assets as per ASC 805 include:
  • Customer Relationships
  • Trademarks
  • Noncompetition Agreement
  • Technology
  • The process of PPA:
    • Determining the purchase price and value of a company’s total asset base.
    • Identifying a company’s underlying assets like tangible assets and intangible assets.
    • Valuing Identified assets and goodwill.
    • Allocating the purchase price to a company’s assets.
    • Reconciling determined asset values.

Accounting Standard Codification (ASC) 350 (formerly known as Financial Accounting Standard (FAS) 142)

  • As per ASC 350 (formerly known as FAS 142) guidelines (Goodwill Impairment), companies perform the goodwill impairment annual test at each reporting unit level. Goodwill impairment test is performed in 2 steps as below –
  • In first step, we calculate the fair value of goodwill and comparing the same with the carrying value; and
  • In second step, if the carrying value is greater than the fair value, the impairment value will be the difference of the fair value and carrying value.
  • Implied fair value of goodwill is value calculated by taking the difference of reporting unit’s fair value and the sum of the individual values of allocation to the assets and liabilities.
ASC 820 Valuation

Accounting Standard Codification (ASC) 718 (formerly known as Financial Accounting Standard (FAS) 123R)

  • As per ASC 718 (formerly known as FAS 123R) guidelines, it regulates the framework for accounting and reporting of share-based arrangements with employees. Company must recognize fair value of stock-based compensation as awarded to employees for financial reporting perspective.
  • This Fair Value recognition of a stock grant must be calculated by using a total intrinsic value method or by using an option-pricing model approach. The fair value of the stock-based compensation is computed as the difference between market price and exercise price of a stock, and such cost of the stock-based compensation is spread over the vesting period and incorporates all types of share-based employee compensation, including stock options, restricted stock, employee stock purchase plan and appreciation rights, etc.

Accounting Standard Codification (ASC) 815 (formerly known as Financial Accounting Standard (FAS) 133)

  • ASC 815 (formerly known as FAS 133) mandate covers comprehensive and complex guidance on derivative and hedging transactions. It provides such reporting practices as required to report hedge gains and losses on fair value basis.
  • As per the guidelines, accounting for different types of hedges including cash flow hedge, fair value hedge, net investments hedge, embedded derivatives and foreign currency hedge, etc. are based on fair value as reported on balance sheet.

At Veristrat LLC, we have a seasoned professional team that understands the intricacies involved in performing such complex valuations accurately and reliably, provides robust financial and strategic solutions to our clients through comprehensive in-depth analysis for 409a Valuation and adhering to quality standards, work for complex purchase price allocation valuations and goodwill impairment complex valuations that help clients to make informed and calculated strategic decisions, provides comprehensive financial statements analysis to determine the fair value of share-based compensation, and performs valuations for such complex derivative instruments demands high-end expertise. Our dedicated valuation team assists clients to compute such complex calculations with comprehensive due diligence and analysis.

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